WASHINGTON D.C. - Firms that hold patents relevant to technical standards notoriously hide in the shadows, hoping other firms will implement the relevant standards and then be vulnerable to suits for patent infringement. In "Patent Holdouts in the Standard-Setting Process," a new paper released today by the Progress & Freedom Foundation’s Center for the Study of Intellectual Property (IPcentral.info), University of Chicago law professor Doug Lichtman suggests that would-be infringers have overlooked a counterintuitive but effective response: use contract law to ensure that large numbers of patent holders can credibly make this very holdout threat. The author is a member of the Center's IP Academic Advisory Council.

The intuition behind Lichtman’s paper is straightforward. A patent holder whose patent is made public only after the relevant technology has been widely adopted can demand not only a royalty that reflects the intrinsic value of that technology but also a royalty that reflects the value of each infringing firm's technology-specific investment. Importantly, however, the greater the number of patent holders in this holdout position, the less each can expect to earn from this tactic. As Lichtman puts it, “if fifteen patent holders can credibly threaten to shut an infringer for six months while that firm redesigns its products and services, the value associated with avoiding six months of disruption must be split fifteen ways. If three hundred patent holders can credibly make that threat, the pro rata share drops by a factor of twenty. Ironically, then, more patents means less money per patent holder.” Of course, less money also means less of an incentive for a firm to strategically delay in the hopes of being a patent holdout, and less of an incentive for an accidental patent holdout to actually bring suit.

In theory, this insight could be harnessed simply by blindly infringing a large number of patents simultaneously. Lichtman, however, endorses a more cautious approach. Accordingly to Lichtman, firms should set this dynamic into motion by using a licensing term modeled after the more conventional “most favored nations” clause. "Under this approach,” writes Lichtman, “licensees would commit to pay known patent holders a royalty that roughly reflects the value of their technologies. Licensees would further commit, however, that if any later patentee can be shown to be earning a rate above that reasonable level, existing patentees would automatically be entitled to a similarly overstated fee."